After years of waiting, we’re getting the itch to buy a home. However, for most people, the process of beginning to thinking about buying a home to actually buying one is usually several years, largely because you need to get your finances in order and save for a hefty down payment.
Before you begin to save for a down payment, though, it’s wise to pay off the majority of your debt, especially consumer debt. If you’re paying 10% or more in interest on credit card debt, paying that off first makes the most sense because you’ll never get that rate of return on your savings. Plus, banks consider your debt to income ratio when approving you for a loan, so the lower your debt load, the better your chance of qualifying for a loan.
If you’d like to buy a home in the near future, here are some strategies for finding money to pay down your debt and then save for that all important 20% down payment:
1. Set up an automatic deposit
Say you want to put aside $400 a month for your home’s down payment. Once that money is sitting in your checking account, it’s easy to spend it despite your best intentions. Instead, set up an automatic deposit to have that money shifted to your down payment fund. After awhile, you’ll forget about the money that’s missing from your paycheck while your savings continue to increase.
2. Update the automatic deposit every time you get a raise
Did you get a 3% raise this year? Good for you! Instead of absorbing the raise as most of us do, change your automatic deposit to include the amount of the raise. Now you’re saving even more.
3. Make your mortgage payment
If you’re paying $850 a month for rent and you estimate your house payment will be $1,200 a month, you’ll need to pay $350 more than your current paying in rent. Start setting aside that $350 a month in your down payment fund. Your savings will grow faster, and you’ll quickly know whether or not you can afford the monthly payments on a house.
4. Set aside any windfall money
If you have a side gig or you get a tax refund, don’t spend that money. Put it in your house down payment fund. If you get a rebate or an unexpected check for a hospital overpayment, put all that money in the bank. You’ll be surprised how quickly it adds up.
5. Do your research
Don’t forget that if you’re a first time home buyer, there are a number of programs that you may be able to take advantage of to lower your down payment costs. Check these out so you know exactly how much you have to save.
Set aside a date such as 36 months from now when you would like to have the entire down payment saved. Then track how much you need to save per month. For instance, if you need a $50,000 down payment, you’ll need $1,388 a month to reach your goal. Every month, update your goal and see how close you are to achieving your monthly savings target. With dedication, you’ll be able to save the money in just a few short years.